What Is an Upside-Down Car Loan?

An upside-down car loan occurs when the outstanding loan balance is greater than the vehicle's current market or trade-in value. This situation is also called negative equity.

A Simple Example

Imagine that your vehicle could currently be traded in for $20,000, but your lender says the loan payoff is $25,000.

Your negative equity is approximately:

$20,000 − $25,000 = −$5,000

You owe about $5,000 more than the trade-in value.

Why Negative Equity Happens

Vehicles generally depreciate, especially during the early years of ownership. A loan balance, however, decreases according to the payment schedule.

Negative equity can occur when a vehicle depreciates faster than the loan balance declines.

It can also result from a small down payment, a long loan term, a high purchase price or rolling previous negative equity into a new loan.

Trading in an Upside-Down Vehicle

If you trade in a vehicle with negative equity, the difference between the payoff and trade value must generally be addressed as part of the transaction.

Possible approaches include paying the difference in cash or financing the negative equity as part of the next loan, if the lender permits it.

Why Rolling Negative Equity Into a New Loan Can Be Expensive

Financing negative equity increases the principal balance of the new loan.

That means you may pay interest on debt associated with the previous vehicle while also financing the replacement vehicle.

How to Estimate Your Equity

Use this simple calculation:

Trade-in equity = Trade-in value − Loan payoff

A positive number represents positive equity. A negative number represents negative equity.

Use Our Calculator

Our car loan calculator allows you to enter both your trade-in value and payoff amount so you can see how the estimated equity affects the amount financed.

Bottom Line

Negative equity does not necessarily prevent you from purchasing another vehicle, but it is important to understand exactly how it changes the new transaction and financing cost.